Income Shows Slow but Continuing Growth of Indiana Economy

Personal income in Indiana grew by 3.5 percent from the third quarter of
2002 to the same quarter in 2003, compared to a national increase of 3.6 percent.
These data, recently released by the U.S. Bureau of Economic Analysis, suggest
a stronger picture of economic advancement in Indiana than will be found on
closer inspection.

Indiana did well from a regional point of view. Our 3.5 percent increase
compared most favorably with the 2.8 percent growth of the Great Lakes region,
which was the second poorest performing of eight regions in the nation (see
Figure 1). The Plains states had the best performance (4.5 percent) largely
due to dramatically increased farm earnings from abnormally low levels a year
ago in states that are highly dependent on agriculture.

Among our neighbors, we were in the middle of the pack (see Figure 2). Indiana
did better than Ohio, Illinois and Michigan, but those three states were ranked
44th, 46th and 49th, respectively, in the nation. Kentucky, the best of our
neighbors, ranked 27th in the United States, while Wisconsin ranked 32nd and
Indiana was 36th in personal income growth.

Components of Income

To assess Indiana’s progress, it is necessary to look at the components
of personal income. First, let’s examine farm earnings in Figure 3.
Since our comparison is from the third quarter of 2002 to the same quarter
in 2003, the jump in Indiana farm earnings was most dramatic (1,186 percent).
Farm earnings nationwide have recovered to their 2001 levels from a very depressed
2002 experience. With this sudden increase, the growth in farm earnings accounted
for 10.8 percent of Indiana’s personal income increase compared to 7.4
percent nationally. But farm earnings, at their revived levels, still equal
only 0.4 percent of the state’s personal income.

Another area where Indiana’s growth exceeded that of the nation was
unemployment compensation. In Indiana, this form of public assistance grew
by 34.4 percent, compared to a national increase of 3.6 percent. Although
the dollars count and help sustain our people, such growth is not evidence
of an economic advance, but rather reflects the hard times being endured by
Hoosiers.

Indiana was adversely affected in the past year by the growth (or rather,
the lack thereof) of increased military spending. Nationally, military personnel
payments increased by 6.4 percent; in Indiana the increase was a mere 0.9
percent. This is not surprising since we have so few military installations
in this state.

The Fate of Private-Sector Earnings

The best way to look at the growth of personal income is to examine what
has been happening to private-sector earnings, the wages and salaries of workers
plus the income of business proprietors. Table 1 shows the percent changes
over the past year in Indiana and the United States.

Table 1 is arranged by the growth rate of business sectors in the country.
Overall, U.S. earnings in the nonfarm private sector grew by 3.2 percent,
while Indiana trailed at 1.9 percent. In the top four growing sectors, Indiana
trailed the nation. In six of the bottom eight sectors, we outperformed the
United States. At the extremes, Indiana outperformed the nation by 3.2 percentage
points in construction and trailed the country by 5 percentage points in finance
and insurance.

In sum, although it would appear that Indiana was just a bit behind the
nation in growth of personal income from 2002:3 to 2003:3, in private nonfarm
earnings—where it counts most—our advances were weak.

Morton J. Marcus
Director Emeritus, Indiana Business Research Center,
Kelley School of Business, Indiana University